FEMA LATEST CIRCULARS STUDY CIRCLE ON 28-04-2010 @ BANGALORE BRANCH OF ICAI Chandra Shekar B D Partner M/s. Shekar & Yathish Chartered Accountants, Bangalore History -FEMA Period of World War II under Defence of India Rules, Exchange Control Law Foreign Exchange Regulation Act, 1947. FERA, 1973. First wind of change in 90 s LERMS (Liberalised Exchange Resource Management System) Series of notification and ADMA Circulars WTO & IMF requirement Opportunity to participate in Global business system Govt introduced FEMA, 1999 1
Objects of FERA, 1947 FERA, 1973 FEMA, 1999 Conserving, regulating and controlling foreign exchange resources of the country Consolidate, regulating dealing in foreign exchange. Proper utilisation in the interest of the economic development the country of Facilitating external trade & payments & for promoting orderly development & maintenance of Foreign Exchange market in India FEMA Updates RBI (FOREIGN EXCHANGE DEPT) CENTRAL OFFICE MUMBAI Notifications Circulars AP (DIR SERIES) AUTHORISED PERSON FORMS AP (DIR SERIES) Master circulars DIPP Circulars (Department of Industrial Policy & Promotion ) 2
Features Not entirely self contained Law Practitioners should have working knowledge of Company law Securities law Income tax Property law Law relating to citizenship and domicile Foreign Company WOS / JV Branch Office Liaison Office Project office Models in India 3
Definition Branch Sec 2(9) of Companies Act, 1956, means any estd described as a branch by the company; or any estd carrying on either the same or substantially the same activity as that carried on by the head office of the company; or any estd engaged in any production, processing or manufacture but does not include any establishment specified in any order made by the CG Liaison office Reg 2(e) of FEM (Est..) Reg, 2000, means A Place of business to act as a channel of communication Between Principal place of business or head office Does not undertake Any Commercial/trading/industrial activity Directly or indirectly Maintains itself out of inward remittances received from abroad thro normal banking channel Branch Office/Liaison Office Regulated by FEM(Establishment in India of Branch or Office or Other Place of Business) Regulation, 2000. Come into force from 01-06-2000. Notification No 22/2000-RB dt 03-05-2000 issued by RBI, (Exchange Control Department) Issues: No Procedural guidelines No eligibility criteria Scope of activities permitted Practical difficulty in getting approvals 4
Recent Notifications / Circulars BO/LO Guidelines for establishing of BO/LO In India by Foreign Entity AP (DIR Series) Circular No. 23 dated 30-12-09 Objective Greater transparency Issued by RBI containing 4 annexes Annex A Broad criteria regarding eligibility for opening of BO/LO, Documentation Annex B Scope of activity permitted and procedural guidelines regulating functionality of BO/LO in India Annex C Form FNC Foreign entity desirous of establishing a BO /LO apply to RBI thro AD Cate -1 bank 5
BO/LO In India by Foreign Entity- Cont..1 Annex D Letter of comfort. Co s who don t satisfy the eligible criteria and are subsidiary of the parent company. Parent company to satisfy the eligible criteria Allotment of Unique Identification Number (UIN) for existing as well as new BO/LO UIN to be quoted RBI and AD Bank BO/LO to obtain PAN Report of same in Annual Activity Certificate BO/LO- Powers of RB/GOI RB or GOI reserves right to reject an application for non fulfillment of any conditions not specifically referred to annexes, fulfillment of which in the opinion of the Reserve bank/goi is necessary for grant of such permission or in public interest. Reserve Bank /GOI also reserves the right to verify/examine the activities of the BO/LO of the foreign entity established in India or withdraw the permission already granted after due notice, if circumstances so warrant or due to changes in the policy. Necessary amendments to FEM (Remittance of Assets) Regulations, 2000 and FEM (Establishment in India of Branch or Office or other place of Business) Regulations, 2000 are being issued separately. 6
BO/LO In India by Foreign Entity- Annex A Eligibility Criteria Application from a Foreign Entity shall be considered on two criteria viz., Basic & Additional Basic Criteria RBI Route This criterion applies where principal business of foreign entity falls under sectors in which 100 percent FDI is permissible under automatic route Govt Route This criterion applies where principal business of foreign entity falls under sectors in which 100 percent FDI is not permissible under automatic route. Applications from entities falling under this category are considered by the RBI in consultation with GOI, Ministry offinance BO/LO In India by F E- Annex A Additional Criteria Track Record For BO Profit making - immediately preceding 5 years in home country For LO - Profit making - immediately preceding 3 years in home country Net Worth BO Not less than 1,00,000 USD or its equivalent LO Not less than 50,000 USD or its equivalent NW = Total Paid-up Capital (+) Free Reserves (-) Intangibles as per latest Audited Balance Sheet/Account Statement certified by CPA or Registered Accounts Practitioner or what ever called 7
BO/LO In India by F E- Annex A Applicants who do not satisfy the eligible criteria and are subsidiaries of other companies may submit a letter of comfort Ann- D, subject that the parent co satisfies the eligibility criteria. Application form FNC along with Letter of comfort (if applicable) to be submitted along with documents prescribed to be filed with Reserve bank. Certificate of Incorporation/registration attested by Notary Public in country of registration Latest Audited balance sheet of Applicant Company No audit - attested by CPA/ Registered Accounts practitioner Bankers report from the applicant s banker in the host country/country of registration showing number of years banking relation with the bank BO/LO In India by F E- Annex B i. Permitted activities Branch office Export/Import of goods Rendering professional & consultancy services Carry Research work which parent co is engaged Promoting technical or financial collaborations between Indian Co and parent/overseas group co Representing Parent co in India & act as buying/selling agent Render services in IT & development of software in India Foreign airlines/shipping co Normally branch is engaged in activity of parent 8
BO/LO In India by F E- Annex B i. Permitted activities Liaison Office Representing parent co/group co in India Promoting export/import from/to India Promoting technical/financial collaborations between parent co/group co and co in India Acting as a communication channel between parent co and Indian companies BO/LO Additional offices Application for additional offices/activities Submit Form to RBI Fresh Form FNC duly signed by authorised signatory of Foreign Entity in home country. If no changes documents need not be resubmitted. No of offices > 4, justification is necessary One office to be designated as nodal office. Request for additional activities other than what is permitted. Submitted through AD -1 Bank. 9
LO Extend validity Request on letter head of LO submitted to AD Bank having jurisdiction LO/Nodal office before expiry. Application from Foreign banks and insurance co s directly recd and examined by Dept of Banking Operations and development, reserve Bank and IRDA respectively. No extension for LO s which are NBFC s and Construction and development sectors(excluding infrastructure development companies) On expiry either to close down or converted into a JV/WOS, in conformity with the extant of FDI Policy. Winding up of LO/BO Request to be submitted to AD Category 1 bank by BO/LO or Nodal office. Application with following docs: a) Copy of RB permission for establishing BO/LO b) Auditor Certificate i. Indicating manner of amt remittable with supporting statement ofassets & liabilities and manner of disposal of assets ii. Confirming the liabilities in India including arrears of gratuity and other benefits are properly met and provided for iii. confirmation that no income accruing from sources outside India has remained unrepatriated to India c) No objection / Tax clearance certificate from IT authority d) Confirmation from applicant/parent co that no legal proceedings in any courts in India are pending and no legal impediment to the remittance e) Report of ROC Compliance with provisions in case of winding up (Notification 198/2009-RB DT 24-09-2009 10
BO/LO Delegation of powers View of liberalising - Powers delegated to AD category 1 banks Application in Form FNC (other than banking and insurance co s) Submit to AD-1 Bank AD-1 Bank Forwards the application to RBI, FX division, Foreign Investment Division, Central Office Mumbai AD Bank has to do the due diligence in respect of applicants back ground, promoters history, nature and activity of business, sourcing of funds, compliance of KYC norms and then forward the application to RBI with comments/recommendations. Applications Banking and Insurance co s Directly with the department of banking operations and development of the Reserve bank and the Insurance Regulatory and Development authority respectively. BO/LO Delegation of powers Approval of RB is not required to establish a branch/unit in SEZ for undertaking manufacturing and service activities, subject to compliance with the Notification No FEMA 102/2003-RB dt 03-10-2003 Submission of Annual Activity Certificate (AAC) Present - AAC by Auditors to CO/RO of RB. Wef 1-2-2010. ending March 31 st to be submitted before 30 th April. Now doc s to be submitted to AD Cate 1 bank and a Copy to Director General of Income tax(international Taxation) by Sole BO/LO Multiple BO/LO Nodal office of BO/LO COMBINED AAC. AD to scrutinize the AAC and ensure activities undertaken by BO/LO are as per the terms and conditions of approval. Adverse findings to be reported immediately to RO/CO of RBI 11
Extension of LO Extension of validity period of LO Wef 01-02-2010, extend validity period of 3 years from the date of original approval/extension granted by RB. Conditions are satisfied AAC submitted for existing LO. AD can confirm about the timely submission of AAC for previous years by LO Account has been operated in accordance with terms and conditions approval Extension to be granted within One month from requested date and intimate RO of RBI. Banking and Insurance directly apply to IRDA/RBI No extension to LO of NBFC and Construction & development sector (excluding infrastructure) Upon expiry close or convert to JV or WOS in line with FDI Policy Closure of BO/LO Reg 6(1)(iii) of Notn No FEMA 13/2000 viz FEM(Remittance of deposits) Regulation, 2000 Conditions and formalities as discussed earlier in winding up of BO/LO are to be submitted Additional docs as specified by RBI approval AD Bank to ensure AAC filed with RBI for existing BO/LO Confirmation from CO/RO of RBI in case of BO/LO concerned On satisfaction allow closure account maintained by them and remit proceeds to the overseas entity. Closure report CO/RO of RBI if documents are not found in order then forward the application to RBI with observations for necessary action. 12
FEM(Remittance of Assets)Reg,2000 Amendment to regulation 6 New condition to be satisfied in case of remittance of winding up of branch office: Report from Registrar of companies regarding compliance with provisions of the Companies Act, 1956, in case of winding up of the office in India. Notification 198/2009-RB DT 24-09-2009 Look alike. 13
NRI Vs PIO Significant difference - NRI & PIO NRI - A person resident of outside India who is a citizen of India PIO Various definitions changing conditions One of the definitions of PIO means an individual (not being a citizen of Pakistan / Bangladesh / Srilanka /Afghanistan / China / Iran / Nepal / Bhutan), who at any time held an Indian passport who or either his father or grand father was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 PIO Citizen of another country but roots are in India FEM(Remittance of assets) Reg 2000 the person is a spouse of an Indian Citizen or a person referred PIO Definition Inclusion of mother & grand mother Defn PIO Reg 2( c) of FEM(Acquisition and Transfer of Immovable Property in India), 2009 has been amended to include mother and grand mother. Notification 200/2009-RB dt. 05-10-2009 PIO can acquire immovable property in India other than agricultural property, plantation or a farm house. Sale consideration funds in normal banking channel foreign currency Sell immovable property to a person resident in India Can gift immovable prop- resident / citizen of India Acquire immovable property gift/inheritance 14
FCEB Foreign Currency Exchangeable bond Governed by Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004 Finance Ministry notified FCEB Scheme 2008 Notification FEMA 188/2009-RB dt 03-02-2009 Retrospective amendment 23-09-2008 FCEB is a foreign currency bond, issued by an Indian Issuing Company (IC) and subscribed to by a person who is a resident outside India. FCEBs are exchangeable into equity shares of an offered company (OC) Parent /Group Co A Issuing Co B Offered Co C Person who is a resident outside India I 15
FCEB- Chart A (Parent / Group Company) I (Resident outside India) Issue FCB B (Issuing Company) Holds shares C (Offered Company) Exchanged / Redeemed into Shares FCEB - Objective Objective Indian corporate houses to raise funds overseas, for acquisitions or Greenfield projects essentially meant for promoter companies to unlock their investments Difference between FCCB & FCEB Of Same Company whereas IC & OC are of same Group/Parent Co Fresh issue of shares on conversion whereas IC/PC should hold shares of OC 16
FCEB Who can issue Issuing Company must be an Indian company, which: Is part of the promoter group of OC; Holds the offered shares in OC; and Is eligible to raise funds from the Indian securities market. Offered Company should be Indian listed company, which: Is engaged in a sector eligible to receive foreign investment; and Is eligible to issue/avail FCCB or ECB. Investor can be any person resident outside India who is permitted to invest in OC, under the FDI (foreign direct investment) policy. FCEB - Proceeds End use of FCEB proceeds Issuing Co Direct Investment outside India in JV or WOS Guidelines to be followed In Promoter Group Co s Parent Co May utilise by complying with ECB regulations FCEB proceeds cannot be invested in real estate and capital market FCEB scheme does not mandate that the investment in group companies should necessarily be by way of equity. 17
FCEB-Approvals An FCEB issue would require the following approvals: From the RBI, by IC. From the FIPB (Foreign Investment Promotion Board), if the investment in OC is not under the automatic route. From IC's board and shareholders, as per company law. From OC's board. How FCEB redemption/exchange works? FCEBs provide an option to the investor for redemption or exchange into shares of OC. The minimum maturity period for redemption must be 5 years. Exchange option can be exercised any time before redemption. Investors are freely permitted to sell OC shares received upon exchange; however, cash settlement upon exchange is not permitted. FCEB Pricing, drawbacks, etc Pricing of FCEB The minimum benchmark exchange price shall be higher of 2week or 6-month average weekly closing prices of OC in a stock exchange, with reference to the board resolution date of IC. All in cost Interest payable and issue expenses incurred in foreign currency shall be as provided under the FEM(Borrowing or lending in Foreign Exchange) Regulations, 2000 viz., not exceed Libor (London inter bank offer rate) plus 250 bps (basis points) Drawbacks on IC The offered shares shall be kept free from all encumbrances. IC cannot transfer, mortgage, make collateral offer of, or trade in, OC shares offered as part of FCEB issue, till its redemption/exchange. 18
FCEB Domestic Tax laws The tax provisions governing FCEBs? FCEB interest payments shall attract tax 10 percent, as per Section 115AC of IT Act. withholding at Taxation of dividend as per Sec 115 AC A non-resident should be eligible to claim treaty benefits The scheme specifically provides that transfer of FCEBs between non-residents shall be exempt from tax in India. Section 47(xa) exempts from capital gains tax any transfer by way of conversion of FCEBs into OC shares. Would IC get interest deduction? The deductibility of interest payments in the hands of IC would be subject to funds being utilised for the purpose of its business, as mandated under Section 36(1)(iii) of the IT Act. Bank guarantees / Advance remittances 19
Enhanced limit for issue of BG on behalf of service importers Import of services limit for issue of BG by AD Category-1 banks stands enhanced from USD100000 to USD-500000. In favour of a NR service provider on behalf of a resident customer who is a service importer. Conditions to be satisfied Banker to be satisfied of a bonafides of the transaction Documentary evidence for import of services Guarantee to secure a direct contract between resident and non resident AP (DIR Series) Cir No 11, dated 5-10-2009 Enhance BG in case of PSC Enhancement Not applicable to Public Sector Companies Dept or Undertaking of Govt of India or State government Approval from the Ministry of Finance, GOI would be required to be obtained for BG exceeding USD 100,000 or equivalent. AP (DIR Series) Cir No 11, dated 5-10-2009 20
Advance remittance for Import of services Similar provisions to BG s Limit increased for Advances for Import of services from USD 100,000 TO USD 500,000 In case of public sector companies, approval of Ministry of finance, GOI for advance remittance without Bank guarantee for amount > USD 100,000. AP (DIR Series) Cir No 10, dated 5-10-2009 CHANGES IN ECB 21
ECB ECB refers to a commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments (ex. Floating rate notes and fixed rate bonds) availed from a non-resident lenders with a minimum average maturity of 3 years. Pledge of shares for securing ECB Looks like to bring parity with FCEB FEM (Tfr or issue of Security by a Person Resident Outside India) Reg, 2000. Notification 202/2009-RB dated 10-11-09 w.r.e.f 11-07-2008. New Regulation 12 introduced: Any person who is promoter of a co registered in India Raised ECB, may pledge shares of the borrowing co or associate resident co for securing ECB. Before pledging No objection from AD bank 22
Pledge of shares-ecb Cont.. AD bank should be satisfied Strictly compliance of ECB guidelines Loan agreement signed by lender and borrower, borrower obtained Loan Registration Number from RBI Security clause in the Loan Agreement requiring the borrower to create charge on financial securities. Additional conditions Period of pledge & maturity of ECB have to be co-terminus Invocation of pledge, tfr in accordance with FDI policy & direction of RBI Certificate of Statutory Auditor Borrower Co will utilise/d proceeds of ECB for permitted end use/s only. FCCB Discontinuing facility of buy back of Foreign Currency Convertible Bonds (FCCB) Indian Companies were allowed to buy back till 31-12- 2009under both the approval route and automatic route. Reasons for discontinuation Macro economic conditions and global developments Improvement in stock prices AP (DIR Series) Circular No. 19 dated 09-12-09 23
Telecom Sector AP (DIR Series) Circular No. 26 dated 22-10-08 Earlier Payment for obtaining license/permit for 3G Spectrum is an eligible end-use for the purpose of ECB under automatic route. AP (DIR Series) Circular No. 19 dated 09-12-09 Now the eligible borrowers are permitted to borrow ECB in the Telecommunication Sector for payment of spectrum allocation. Restoration of All-In-Cost Ceiling in respect of ECB under Approval Route All-in-cost includes Rate of Interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in India rupees. However payment of with holding tax in Indian rupees is excluded for calculating the all-in-cost. Withdrawal of existing relaxation in all-in-cost ceiling under approval route for ECB s (such ceilings were not applicable till 31-12-2009 vide AP (Dir series) circular No 64.) 24
All-In-Cost Ceiling Cont. RBI has again prescribed such all-in-costs ceilings in respect of Loan agreements which have been signed on or after January 1, 2010 as under: Average Maturity period All-in cost ceiling over 6 month Libor 3-5 years 300 basis points > 5years 500 basis points If ECB agreement are signed on or before 31-12-09, where all costs exceed ceilings, then furnish a copy of loan agreement with RBI. Such Proposals would continue to be considered under approval route AP (DIR Series) Circular No. 19 dated 09-12-09 NBFC-ECB Under Approval route Existing Co Borrow from Multilateral/regional financial institutions Government owned development financial institutions Thrust given for development of infrastructure sector Allowed to borrow From Recognised lender category including International banks Subject to complying with prudential standards prescribed by RBI Borrowing entities should hedge their currency risks AD Category 1 bank should certify compliance with prudential norms by the borrowing NBFC 25
NBFC-ECB.. Recognised lender category International banks International capital markets Multilateral financial Institutions such as IFC, ADB, CDC, etc Export credit agencies Suppliers of equipments Foreign collaborators Foreign Equity holders AP (DIR Series) Circular No. 19 dated 09-12-09 Integrated townships with ECB Earlier corporates engaged in the development of integrated townships were permitted to avail ECB under the approval route until 31-12-2009. Press note 3 (2002 series) dated 04-01-2002 issued by DIPP (Department of Industrial Policy and Promotion), Ministry of Commerce & Industry, Govt of India Extended by one year till 31-12-10. All other terms and conditions stipulated remain unaltered. AP (DIR Series) Circular No. 19 dated 09-12-09 26
Integrated townships Integrated Townships Housing, commercial premises, hotel, resort, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transport systems and mfr of building materials. Development of land and providing allied infrastructure forms an integrated part of township development Minimum area to be developed should be 100 acres. Norms and standards as per local bye laws/rules. In absence of byelaws, a minimum of 2000 dwelling units for about 10,000 population will need to be developed. FCCB s BUYBACK -Discontinued RBI keeping in viewing the prevailing macroeconomic conditions and global developments especially improvement in stock prices. Buyback of FCCB s is discontinued with effect from 1-1-2010. Earlier Indian co s were allowed to buyback under both automatic as well as approval route. Facility remain valid till 31-12-2009 27
Export or Import of Currency FEM(Export & Import of Currency) Reg, 2000 Amendment Reg 3 Enhance the limit of export or import of Indian currency notes from Rs 5000 to Rs 7500. A person can take outside India / at time of returning to India after temporary visit to any foreign country can bring into India. Both the conditions of export and import excluded for Nepal & Bhutan Notn 195/2009-RB dated 7-7-2009 Exchange Earners Foreign Currency (EEFC) Account by SEZ Developers FEM(Foreign Currency A/c by a person resident of India) Reg, 2000 Para 1A of Schedule Eligibility to open, hold and maintain EEFC account by SEZ developers All categories of foreign exchange earners are allowed credit upto 100% of foreign exchange earnings AP (DIR Series) Circular No. 22 dated 29-12-09 28
Data on ECB/FCCB Nov 2009 Sl No Route Equivalent Amount in USD 1. Under Approval Route ( incl FCCB of USD 1,300,000,000) 2. Under Automatic Route (incl FCCB of USD 105,000,000) 1,632,171,848 721,493,738 TOTAL OF ECB/FCCB 2,353,665,587 IDR FOREIGN CO S- PLEDGE SHARES TRADED AS IDR IN INDIAN MARKET IN RUPEES DEPOSITORY IN INDIA 29
Issue of IDR Companies (Issue of Indian Depositary Receipts) Rules, 2004 called IDR Rules Facilitates companies resident o/s India Issue IDR s through Domestic depository Persons residing in India and o/s India can purchase, possess, transfer and redeem IDR s IDR s shall be issued in Indian rupees FEMA regulations not applicable to person Resident of India FII & NRI may also invest, purchase, hold & transfer subject to FEM (Transfer or issue of Security by a person resident outside India) Regulations, 2000 Issue of IDR cont.. NRI can invest in IDR s out of NRE/FCNR (B) A/c Provides procedures for transfer and redemption of IDR s. Pre-condition IDR shall not be redeemable into Equity shares before expiry of One year period from the date of issue of IDR AP (DIR Series) Circular No. 5 dated 22-07-09 30
Money Changing Activities Suspicious Transaction Reporting All authorised persons are brought within the definition of Financial institutions. Suspicious transaction report to Financial Intelligence Unit-India(FIU-IND) within 7 days. Sole responsibility of franchisor to the reporting requirements. Change in revision of KYC norms, AML standards, Combating the financing of Terrorism(CFT) for money changing activities Money Changing Activities Suspicious Transaction Reporting Non compliance Penal provisions under FEMA, 1999; PMLA, 2002 AND PML(Maintenance of records of the nature and value of transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of records of Identity of the Clients of the Banking Companies, Financial institutions and Intermediaries) Rules, 2005, as amended from time to time. Retention of Records shall be maintained for a period of TEN YEARS. 31
Hot News.. CA s, CS told to report frauds directly to Home ministry Economic times Saturday-24-04-2010 Sec 51A of Unlawful Activities (Prevention) Act Suspicious activities include cases where an entity approaching them for investing into financial instruments or immovable property or arrange for incorporating a company as a director, share holder or partner Professionals to report suspicious transactions within 24hours. 32
Private Equity Stiff valuations Economic Times dt 26-04-2010 Foreign Private Equity firms - Buying stake in Unlisted Co s Valuation on discounted cash flow Earlier CCI GUIDELINES Average of Profit earning capacity value method Net Asset Value method Thank you cashekar@ gmail.com 33